Beige Book Report: San Francisco
October 14, 2015
Economic activity in the District grew at a moderate pace during the reporting period of late August through early October. Overall price inflation appeared to firm slightly, and upward wage pressures increased further. Retail sales grew moderately, while demand for business and consumer services picked up further. Manufacturing output was largely unchanged overall. Agricultural activity edged up. Conditions in residential and commercial real estate markets expanded further. Lending activity ticked up.
Prices and Wages
Overall price inflation appeared to pick up slightly on balance. Prices for health-care services edged up, while pharmaceutical prices continued their rapid ascent. Housing costs have been rising significantly in some urban markets due to growing demand combined with tight availability. Contacts in the restaurant industry reported price increases, particularly for catering services. By contrast, retail grocery prices remained flat, with vigorous industry competition preventing retailers from passing on cost increases to final prices. Lower natural gas prices reduced electricity costs. Ongoing price declines were noted for technology products and services and industrial commodities such as steel, due in part to low import prices arising from past dollar appreciation. High yields held down prices for selected agricultural products.
Upward wage pressures grew moderately across the District. The impact of higher minimum wages implemented over the past year began to filter through to the retail sales sector and increased wages for lower-skilled workers in some areas. Wage pressures grew in the health-care sector, particularly for specialized positions such as nurses and software developers. Shortages of skilled labor contributed to further wage increases in both the technology and construction sectors. Wages in the financial sector remained flat. Some contacts reported that, while wage pressures had not yet materialized in many industries, the number of job applicants for new positions fell, and difficulties finding workers with appropriate skills is a primary concern.
Retail Trade and Services
Retail sales grew at a moderate pace over the reporting period. Contacts reported that sales were bolstered in part by rising tourist activity in some areas. Sales of mobile computing devices were strong, spurred by rising consumer demand for wearable computing items. Sales in the grocery sector remained flat, and low-cost retailers gained market share as consumers remained price conscious. Apparel sales fell slightly.
Demand for business and consumer services expanded further. Activity in the technology services sector expanded, particularly for cloud-based remote services. Infrastructure investment in data centers continued to build in anticipation of future adoption of public cloud services. Activity in the hospitality sector expanded further, and hotel occupancy rates remained high. Demand for health-care services was largely steady despite rising rates of insurance coverage in some parts of the District.
Manufacturing
Manufacturing activity was mixed but appeared flat on balance. Domestic output in the steel industry remained weak, as earlier dollar appreciation increased import competition, especially from China. Semiconductor sales slowed slightly. By contrast, demand for biotech products and pharmaceuticals has been expanding briskly, fueling high levels of capital spending and robust mergers and acquisitions activity. Orders of new aircraft dropped, but the elevated level of existing orders kept deliveries above their level from the same period last year. Contacts in the defense industry reported that federal sequestration continued to be a drag on new orders, prompting some firms to emphasize cost reduction and efficiency measures to maintain profitability. Uncertainty over the federal budget has put a crimp on defense industry planning over the near to medium term.
Agriculture and Resource-Related Industries
Agricultural activity expanded slightly during the reporting period. Contacts noted that the grain yield this year was excellent, although ample supply held down profits for individual growers. Higher-than-normal temperatures increased potato yields but reduced crop quality somewhat. A few contacts expressed concerns that the strong dollar has been restraining agricultural exports, and producers have not yet adjusted crop plans to account for slower demand growth from China. Extensive forest fires slowed logging activity, but contacts anticipate a return to normal production levels when expected fall precipitation helps bring wildfires under control.
Real Estate and Construction
Real estate activity picked up further. Contacts reported continued strong growth in residential housing construction throughout the District. Construction of new multifamily units continues to outpace construction of single-family units, and sales of existing homes remained strong. Labor conditions remain tight, and contacts reported having trouble scheduling contractors and completing construction projects on time and on budget. However, a contact in Salt Lake City mentioned that employment in the construction sector has not yet returned to its pre-recession level in that region. Permits for new residential projects grew modestly, although shortages of available land continued to constrain new construction somewhat. Contacts in the Bay Area and Los Angeles reported that prices for lower-end units grew faster than prices of luxury units, and they emphasized that affordability will remain a concern for the foreseeable future.
Financial Institutions
Lending activity grew modestly over the reporting period. Overall lending activity edged up, with funds remaining in ample supply relative to borrower demand. Deposits expanded further, particularly for short-term accounts, and banks reported difficulties converting short-term deposits into longer-term assets. Most contacts reported continued weakness in net margins and slow growth in profitability stemming from current low rates and uncertainty about future interest rate movements. Tight lending conditions in the residential market persist as banks remain wary of speculative projects. However, lending for commercial projects grew moderately over the reporting period. Capital levels remained relatively high, particularly for community banks. One contact mentioned that initial public offerings for technology companies had cooled due to international economic uncertainty, but mergers and acquisitions activity remained strong.